A group of Chrysler's secured lenders is seeking to block its plan to sell its business at auction this month, arguing that the U.S. government is violating federal law in a bid to preserve the automaker, which just filed for bankruptcy protection.

The group, calling itself Chrysler's non-Tarp lenders, seeks to block the proposed sale of Chrysler to an alliance led by the Italian automaker Fiat SpA; it also seeks to block Chrysler's request for approval of a $4.5 billion Treasury Department loan to finance the reorganization. The group said secured lenders that agreed to the Fiat deal, such as JPMorgan Chase & Co., Citigroup Inc. and Goldman Sachs Group Inc., were conflicted because they had accepted funds through the Treasury's Troubled Asset Relief Program.

The process is "tainted" because it was dominated by the government, the lenders argued in papers filed Monday in U.S. Bankruptcy Court in Manhattan. The group also said the short period of time given to evaluate the deal was improper and said the hearing on bid procedures that began Monday should be delayed. The judge delayed the hearing until Tuesday, ordering the members of the lender group to reveal their identities.

The sale "improperly attempts to extinguish their property rights without their comment," lawyers for the lender group wrote in court papers. "The sale motion should be denied because it seeks approval of a sale that cannot be approved under the bankruptcy code," and "The court should not permit a patently illegal sales process to go forward."

Chrysler's alliance with Fiat would create the world's sixth-largest carmaker. Chrysler, of Auburn Hills, Mich., was unable to pursue the merger outside bankruptcy because of opposition by the objecting lenders.

The Fiat offer, to be made from an as-yet-unnamed entity formed by Fiat, Chrysler employees and other parties, would be the lead bid in an auction, which is typically required for assets sold in bankruptcy. Chrysler is asking U.S. Bankruptcy Judge Arthur Gonzalez to approve bidding rules for an auction, which would require creditor objections to the sale be submitted by May 11, followed by a May 15 deadline for competing bids. Chrysler seeks a May 21 hearing to approve the winning bid, according to the court filing.

Chrysler, in its April 30 filings, listed assets of $39.3 billion and liabilities of $55.2 billion, making it the fifth-largest bankruptcy in U.S. history, according to data compiled by Bloomberg News.

Chrysler's proposed sale favors junior creditors over senior creditors and would improperly channel the proceeds to specific creditor groups, the lender group said in the court filing.

In court Monday, Thomas Lauria, a lawyer for the group, said some of its members have received death threats. In response to the judge's demand that the members of his group be revealed, Lauria said more of them would be identified "promptly."

Some of the lenders have already been identified, including OppenheimerFunds Inc., Perella Weinberg Capital Management LP's Xerion hedge fund and Stairway Capital Advisors.

The group also objected to the request for debtor-in-possession financing, saying the terms of the loan, along with other requests by Chrysler, channeled $25 billion into the hands of other claimholders, including other secured lenders. Some of those lenders have received Tarp funds, the group said in the filing.

The group argued that the payments subvert the usual Chapter 11 bankruptcy process. Under Chrysler's first-day motions in the bankruptcy case, it sought to pay $5.3 billion to business partners, $4.5 billion in other pre-bankruptcy debt, including employee wages, $9.8 billion in health care and other worker benefits, $5 billion in unfunded pension payments and $2 billion to secured lenders.

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